Conflict Swirls as U.S. House Nears Vote on Permanent R&D Tax Break

The U.S. House of Representatives is nearing a vote on a bill that would make a popular tax break for corporate research spending a permanent part of the tax code. But although the House bill has bipartisan support, the White House is threatening a veto. The Senate, meanwhile, is working on a less sweeping proposal. The legislative flurry highlights the complicated politics surrounding efforts to renew the so-called R&D tax credit, which Congress last year let expire for the sixth time in 21 years.

The credit, created in 1981, “is probably one of the least controversial provisions of the tax code,” said Representative Tom Cole (R-OK) today in a statement on the House floor. It allows companies to write off about one-fifth of their spending on research and was worth some $7 billion to U.S. firms last year. Both Democrats and Republicans have long endorsed making it permanent in an effort to spur innovation and job creation. This year, lawmakers in both the House and Senate have introduced legislation to do just that.

In practice, however, Congress has traditionally extended the R&D credit for just one year, or a few, at a time.

The problem with permanence: paying for it. Fiscal conservatives from both parties have long demanded that backers of making the credit permanent find a source of revenue, or identify budget cuts, to make up for the lost cash. Budget analysts estimate that the government would forgo $156 billion in revenue over the next decade under the proposal before the House today (H.R. 4438), which provides no mechanism for recovering that money.

That’s why the Obama administration, which has its own proposal for making the tax credit permanent, “strongly opposes House passage of H.R. 4438,” the White House’s Office of Management and Budget said in a statement released yesterday. And it chided the House’s Republican leaders for promoting legislation that bucks their own party’s commitment to reducing—and not adding to—spending deficits.

The White House’s veto threat hasn’t gone over well with many business groups. Some argue that Congress shouldn’t worry about offsets, predicting the tax break will more than pay for itself by generating new economic activity. Others suggest the government should get on with making the tax break permanent to provide companies with some certainty as they make long-term investment decisions, and then figure out how to pay for it.

Think tanks that support a permanent R&D tax break are also unhappy. “Given that the Obama Administration has publically supported increasing the R&D credit and making it permanent, it is troubling that they are now threatening to veto this pro-growth measure,” said Robert Atkinson, president of the Washington, D.C.-based Information Technology and Innovation Foundation, in a statement today.

In Congress, fault lines have appeared in both parties. Not all Democrats are lining up with the White House against the bill—and not all Republicans are expected to support it. Nine of the bill’s 23 co-sponsors are Democrats. But the legislation received just a single Democratic vote—from Representative Earl Blumenauer (OR)—in a 22 to 12 committee vote to send it to the full House. Another Democratic co-sponsor, Representative John Larson (CT), told the Bloomberg BNA news service that he is thinking about voting for the bill on the floor (after voting against it in committee). Some Republican spending hawks, meanwhile, may vote against the measure because it would add to deficits.

In part, the split reflects the varying nature of the industrial bases in different House districts. Many lawmakers backing the bill come from districts with a strong concentration of high-tech, pharmaceutical, and other businesses that invest heavily in research. In contrast, lawmakers from rural, agricultural districts may feel less pressure to back the measure—and get complaints from antideficit voters if they do.

Whether the bill’s backers can tack together enough votes to get it through the House should be known soon: A vote on H.R. 4438 could come as early as Wednesday evening.

The Senate, meanwhile, is working on its own bill, which would extend the R&D tax break for just 2 years.